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How to Analyze Real Estate Deals

Analyze Real Estate Deals- this is one of the most popular dilemmas I hear from new real estate investors. Questions like “How do I know if it is a good deal?” and “How do I come up with a price to offer?” are very common and not at all out of place. It is very important to understand the mechanics on how to analyze real estate deals, in order to properly make an offer with good odds of getting accepted and without looking like an amateur.

Analyze Real Estate Deals:

There are a few recommendations and tips that I will go over in this article to help you understand how to analyze real estate deals and since it is a numbers’ game, how to set it up in a way that will save you time and allow you to analyze multiple deals effortless.

  1. Organization is key – set up all the properties with built in formulas in one spreadsheet. For instance, comparables for the area, average value multiplied by 70% (which equals your offer price for the property), adjusted for closing costs, and other fees.
  2. For each property you should evaluate 3 different scenarios
  1. How much could this property sell for “as is?”
  2. How much would it sell for if fixed up?
  3. How much are the repair costs?

3. Run a CMA (Comparable Market Analysis) – the MLS (Multiple Listing Service) is the best tool to give you this information. You want to use the same tool that appraisers and lenders do, which is still the MLS.

Now there are some important points to remember when using the MLS for the CMA:

  1. Look for houses that actually “sold,” not active, pending or expired, in the last 6 months, which are similar to yours in size and age;
  2. Disregard if possible short sales and foreclosures – these represent “distressed” values and are not indicative of the market values;
  3. All the comparables should be in the same neighborhood and within 1/2 mile of subject property. In some instances, there could be exceptions – different zip codes, major streets separating the same neighborhood and values, rural areas, etc. That is why it is important as an investor to concentrate and specialize in one area at the time, so you can become familiar with the exceptions and the trends.

Even if you don’t do repairs yourself, you need to take these in consideration when you analyze real estate deals, because they will affect the value and what buyers are willing to pay for the property:

  • If you are not familiar with repairs estimates, on the first deals take a contractor with you, even if you have to pay for his/her time. You will very soon get the general idea of costs involved and you can do it yourself.
  • Use a ballpark figure approach, don’t worry about an exact amount. Repair costs are highly subjective on how much work a contractor or buyer wants to do. It can vary widely, so just take an average best estimate approach.

Rule of Thumb on How to Analyze Real Estate Deals:

This is another question I get asked frequently. “Do you have a rule of thumb when you estimate how much to offer?” Most investors (rehabbers, landlords, etc.) will pay at the most around 70% of the After Repair Value. So if you are a wholesaler, you want to pay as below as you can from 70%, since that is your profit. If you are planning to buy and hold, 70% should be the top that you will pay for any property.

Therefore the After Repair Value is determined by looking at the CMA for comparable properties and your offer should be no more than 70% of the average value of similar properties that have sold in the last 6 months.